In the latest in a series of DC columns from Newton Investment Management, Jin Philips considers what we can expect in the next stage of master trusts' development
Welcome to the first in Newton's defined contribution (DC) column series for 2019, in which we will explore some of the key issues and developments for DC schemes. As we enter a new year, DC master trusts have come of age, with membership now standing at over 13.9 million, compared to only 270,000 at the beginning of 20121. By this summer we will know which master trusts (in addition to LifeSight) have been authorised and which will be wound up or consolidated. Furthermore, the final phase of auto-enrolment contribution increases will have come into effect, and DC schemes and investment managers will have had nearly five years to acclimatise to the 0.75% charge cap since it was announced. With these regulatory changes firmly embedded, what can we expect in the next stage of master trusts' maturity and scale?
Even if the UK government's proposal that micro and small DC schemes review their scale every three years does not become a regulatory requirement, master trusts' established value proposition is likely to continue to attract single-trust DC schemes, both small and large, and at a rapid pace. In turn, master trusts will undoubtedly want to flex their increasing bargaining power with investment managers and other service providers to drive down costs. In particular, managers of active and less liquid strategies may be encouraged to adapt their offerings for the DC market, having witnessed master trusts' steep growth in assets under management year on year.
Master trusts' default investment strategies are likely to evolve in parallel with the government's drive for greater diversification, and as governance models seek to demonstrate value. However, any material correction in equity markets may prompt master trusts to review their default strategies. Such an environment may shed new light on the performance records of select diversified growth funds during previous corrections such as 2008, 2011 and the fourth quarter of 2018, and potentially lead schemes to consider increasing their allocation to such solutions in default strategies of the future.
As the number of players in the master trust world shrinks meaningfully following authorisation (from the existing 90), the schemes will continue to articulate their unique selling points and seek even greater scale. Beyond fees and costs, master trusts are competing on a wide range of fronts, from two-step security verification and employee education to in-scheme drawdown. With many master trusts soon having the scale to be able to deliver an increasingly sophisticated and cost-effective offering to employers and members, asset managers will need to rise to the challenge with investment solutions that can meet their evolving requirements.
Jin Philips is head of strategic relationships EMEA at Newton Investment Management
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